The Origin of Blockchain — From Cypherpunks to Satoshi to IBM

How the ’80s privacy activism led to the development of Blockchain — the technology of transparency


Bitcoin launched nearly 10 years ago. Since then, we saw a steady revolution in cryptocurrencies, ICOs and peer to peer electronic platforms. Bitcoin also brought us Blockchain — a technology that is predicted to transform how we do business almost in every industry, through its dis-intermediation, immutability, transparency and trust applications.

Irrespective of our liking for bitcoin or lack thereof, it is evident that Bitcoin has been one of the most significant technological inventions of the 21st century. Few quick summaries are —

  • hundreds of billions of dollars of new assets created, in bitcoin
  • thousands of new cryptocurrencies created
  • hundreds of new platforms built for trade and cooperation
  • hundreds, if not, thousands of new businesses created
  • hundreds of the largest companies on this planet are collaborating in several alliances — on building solutions using the blockchain

Why has this technology been so transformative?

To fully appreciate its place in history, let’s go back a few decades and take a look at the motivations behind Bitcoin — what started all of this? Then move through the various evolutionary advancements in cryptography and market events that led to the launch of bitcoin. Finally, how Blockchain — the underlying technology of bitcoin — was identified as this versatile and transformative enterprise application.

This article is aimed for general reading, however, if you are new to blockchain, please check my other article explaining this technology in detail, this is a 30-minute read. It is not necessary that you read it before, however, is a useful resource.

Okay, let’s get to it!


Cypherpunk movement, Crypto anarchism in the late ‘80s

Use of cryptography is known to have existed as early as 1900 BCE, as found in some hieroglyphs carved into the tomb at the old kingdom of Egypt, in around 1900 BCE.

Modern cryptography saw vast advancements during the two world wars, especially during World War II. The problem was that simple radio communication could be picked up by anyone, thus was vulnerable for interception by the enemy. The solution employed was scrambling or encrypting of the radio signals. Only the intended listener with the required deciphering mechanism, or the key, could reconstruct the original message.

The German Enigma machine is known and studied for their widespread use during World War II. All major powers, including the US and UK, was involved in massive programs developing cryptography.

In the ’70s and ’80s, digital communication took off, however, also gave rise to mass surveillance by governments and big businesses — very similar to how Google or Facebook today may know more about me than I know myself!

The Cypherpunks movement, led by several intellectual mathematicians and cryptographers of the time, put forth a resistance against this surveillance by advancing the use of cryptography in an aim of preserving privacy for individuals. This led to a sustained competition, starting in the ’80s and then in the ’90s, between the crypto activists and the government surveillance communities, which also resulted in advancements in the field of cryptography.

Cypherpunks movement, in the late 80's became the crypto-anarchist movement and included many notable computer industry figures, such as —

  • Bitcoin developer Hal Finney
  • Blockstream’s Adam Back
  • BitTorrent creator Bram Cohen
  • The leader of the crypto-anarchist movement Tim May
  • Wikileaks founder Julian Assange
  • Zcash founder Zooko Wilcox-O’Hearn.

The Crypto Anarchist Manifesto, initiated in the late ’80s and published in 1992, by Timothy C May, wrote in part…

“…Computer technology… providing…for individuals and groups to communicate …in a totally anonymous manner… exchange messages, conduct business, and negotiate electronic contracts without ever knowing the True Name, or legal identity, of the other…untraceable, via extensive re-routing of encrypted packets…”

Further adding that cryptography will fundamentally alter the nature of economic transactions, lessening or removing the government’s role in them, similar to how printing technology reduced the power of medieval guilds, permanently altering social power structures and revolutionizing the world.

“…combined with emerging information markets, crypto anarchy will create a liquid market for any and all material which can be put into words and pictures…”


Pre-bitcoin cryptocurrency applications

By the end of the last century, with the spread of internet and online communication, people wanted to transact and trade online.

The first examples were of sharing files like barter. A notable difference though with a currency application is that for online file sharing, the same data can be shared as many times as possible since an infinite number of copies of any file can be made. Therefore, file sharing took off relatively quickly.

For an online currency though, the critical challenge remained of what is known as a double spending problem. Any electronic document could be replicated as many times as someone wanted, therefore, if a digital currency were merely a digital copy of some currency document, it would not work since it could be copied endlessly and money would grow out of thin air. Therefore, it would not work due to the double-spending problem.

Following the philosophy discussed before — of Cypherpunks and crypto-anarchists — several renowned mathematicians and crypto experts took upon the challenge to solve double spending problem through achieving advancements in cryptography. These attempts and improvements contributed heavily to building the learning curve, the platforms and the ecosystems of cryptographic capabilities that could be used in developing and launching bitcoin in 2009.

The most noteworthy of the advancements and applications were —

1989–1998, Digicash

Founded by David Chaum, a prominent cryptographer, to facilitate anonymous online transactions that were untraceable. Somehow did never become widely popular as e-commerce was yet to take off and the entity declared bankruptcy in 1998.

1996–2009, E-Gold

E-gold was founded by Douglas Jackson and Barry Downey in 1996 and grew to 5 million accounts by 2009 when operations were ceased due to legal issues. Founder Douglas Jackson eventually pled guilty to charges of money laundering.

1998, B-Money

A proposal by prominent computer engineer and cryptographer, Wei Dai, for an anonymous, distributed electronic cash system, was published on the Cypherpunks mailing list.

Hashcash, a Proof-of-work (PoW) system of solving cryptographic puzzles — was proposed just a year before in 1997 by Adam Back within the same Cypherpunks mailing list — that could be used to prevent or limit email spam and denial-of-service attacks.

Wei Dai’s B-Money protocol proposed the use of the same Proof-of-work (PoW) function of Hashcash as a means of creating money.

In B-Money, the transaction is broadcast among all participants to transfer money. All participants keep accounts of all others. Use of Proof-of-work (PoW) and few other protocols were proposed as part of B-Money.

Exactly same or very similar ideas were used nearly 10 years after in Bitcoin, including Proof-of-work (PoW), distributed system with everyone keeping a copy of the complete ledger etc.

1998, Bit-Gold

Nick Szabo proposed a decentralized currency system with a limited supply of digital money issued to people who devoted computing resources.

Nick Szabo proposed a mechanism for a decentralized digital currency, never implemented, but has been called a direct precursor to the Bitcoin architecture, where —

‘’A participant would dedicate computer power to solving cryptographic puzzle, solved puzzles would be assigned to the public key of the solver, each solution would become part of the next challenge, thus creating an ever growing chain of new property”

This aspect of ‘chaining’ paved the way for the network to time-stamp and validated new coins, and was used in bitcoin network nearly ten years after.

2004, Ripple Pay

Ripplepay was developed in 2004 by Ryan Fugger, to create a monetary system that was decentralized and could effectively allow individuals and communities to create their own money.

This led to a new system designed and built by Arthur Britto and David Schwartz later into what we know today as Ripple, a real-time gross settlement system, currency exchange and remittance network created by Ripple Labs Inc.

2004, Reusable Proofs of Work as e-money

Designed by renowned bitcoin developer Hal Finney. It is another use of Hashcash Proof-of-work (PoW) system, here used as a reusable token. The idea is to back the virtual currency by a real-world value of the expended computing power used in PoW.

Bitcoin incorporates many of these cryptographic breakthroughs that came much before.


The financial crisis of 2007–08

Considered the worst financial crisis since the Great Depression of the 1930s, these years saw worldwide meltdown of financial systems, including —

  • the collapse of large financial institutions prevented by government bailouts
  • the drop of stock markets worldwide
  • housing market tanked resulting in foreclosures, evictions, unemployment
  • prolonged liquidity problems hampering economic activity — the great recession
  • declines in wealth estimates in trillions of US dollars
  • leading to the European sovereign debt crisis
  • and generally eroding trust in traditional banking systems backed by governments.

Several events compounding over a long period resulted in the creation, growth and then bursting of the ‘sub-prime mortgage bubble,’ which then like a chain reaction, sent shock waves across sectors, systems, and countries, bringing down the world economy to its knees.

Public sentiment for the government and big businesses was at its lowest. Government support for large banks to stabilize the financial markets was seen as ‘bailing out’ and ‘rewarding’ of the financial sector for its ‘misdeeds.’

These events no doubt added a strong impetus to bringing an alternative mechanism for transaction facilitation to the government-backed large banks. Online peer-to-peer system of accounting and transfer was the way to go, following the many cryptographic advancements and learning from the previous attempts.


Satoshi — Bitcoin White Paper and Launch

The bitcoin white paper was published in October 2008, and then, bitcoin was launched in Jan 2009. It is still not known who Satoshi was or were. Given the effort of putting together such a sophisticated platform, some opine that it was a group and not a single person.

The debate is out there as well on the significance of the timing. Many are of the opinion; bitcoin simply was a response to the financial crisis — the ‘illegitimate’ ways governments of ‘rewarding’ and ‘bailing out’ potential miscreants in the financial sector, thus providing an alternate currency free of any governments.

The timing might have just been an opportune moment for stronger adoption, but as we reviewed throughout this article, the motivations of anonymity and untraceability in online transactions, no doubt, was the primary driver behind not only bitcoin but the several advancements in cryptography and cryptocurrency applications that came before it.


Blockchain — The Enterprise Application

After the launch of bitcoin, much after, by around 2015, we started seeing platforms built with the underlying technology of bitcoin for enterprise use. Hyperledger Fabric was launched by The Linux Foundation by December 2015 and was originally contributed by IBM and Digital Asset.

Aimed at building enterprise solutions leveraging bitcoin’s underlying technology — aptly named blockchain since blocks of transactions are chained together using cryptographic hash functions for immutability — for diverse enterprise processes.

The platform provided a modular architecture, along with plug-and-play consensus mechanism, and integration of smart contracts and membership services, and finally, managing access control for privacy.

The Fabric Network also introduced the idea — that was not seen in distributed solutions until then — of separating roles between the various nodes in the infrastructure — peer nodes, orderer nodes, membership service provider.

With the enormous potential of diverse applications and transforming how we do business, some of the benefits sought from enterprise blockchains are —

  • dis-intermediation — follows distributed architecture, removing intermediary, therefore true to the original goal of peer-to-peer transactions
  • immutability — due to cryptographic chaining using hash functions, data on the chains cannot be removed, edited or deleted
  • provenance — an immutable ledger retaining history
  • transparency — with distributed architecture and immutability properties, transactions are recorded only after a consensus between multiple parties, therefore, brings unprecedented transparency to the process managed by blockchain

Conclusions

Bitcoin originated from several technologies and cryptographic advancements that came from the activism and the quest for anonymous online sharing and trading through peer-to-peer systems. The philosophy behind crypto activism — of anonymous transactions or untraceability and to fight against the prying eyes of the government or big businesses — is still front and center in the minds of many bitcoin purists.

Recently, Ethereum co-founder, Dr. Vitalik Buterin, said that IBM’s corporate blockchain is ‘missing the point.’

The comment was baffling to many, to say the least, however, makes a little bit more sense when we remind ourselves that anonymity and untraceability were the primary goals of the movement, almost 25 years ago, that led to the crypto enabled currency systems, such as Bitcoin or Ethereum.

Corporate or permissioned blockchains, however, do not share those goals — therefore correctly pointed out by Vitalik as ‘missing the point’ — since identities of all participants are validated and known to the network in any permissioned ledger.

Yes, its a bit ironic.

Democratization and re-purposing of the underlying blockchain technology for enterprise use is a major boon and a gift to the corporate world and in many cases governments. However, it is much beyond the manifesto goals and maybe an ironic consequence, that was not intended by its creators. The crypto activists were competing against these entities, to begin with, seeking anonymity and freedom from their prying eyes.


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Data Driven Investor

from confusion to clarity, not insanity

Soumitra Bandyopadhyay

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Analytics, AI/ML, Blockchain, FinTech/Payments, RPA | https://www.linkedin.com/in/sombando/ | https://twitter.com/sombando

Data Driven Investor

from confusion to clarity, not insanity